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Should You Take Profits On CRH PLC And Wolseley plc?

crhCement giant CRH (LSE: CRH) and plumbing and heating firm Wolseley (LSE: WOS) have a combined market cap of nearly £20bn, and a strong presence in both the UK and US markets.

One winner, one loser

Wolseley’s share price has risen by 110% over the last five years. Despite paying no dividend in 2009 and 2010, the firm’s dividend payments since 2011 have contributed to a five-year average annual total return of 20% — nearly double the 11% provided by the FTSE 100.

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Things haven’t gone so well for CRH. The firm’s share price has fallen by 20% from its March peak and is currently at 2009 levels. CRH’s dividend has also remained flat since it was cut in 2009, making the firm’s current 3.5% yield look less attractive than it might do otherwise.

Is there better to come?

Here’s a snapshot of the valuation of our two firms:

 

Wolseley

CRH

2014 forecast P/E

17.2

21.1

2015 forecast P/E

15.0

15.9

 

 

 

2014 forecast yield

2.5%

3.7%

2015 forecast yield

2.8%

3.7%

Both firms already have a decent level of growth priced into their shares, in my view.

I suspect that CRH’s share price is partly supported by its dividend yield, but 21 times forecast earnings seems very expensive to me, especially as CRH’s operating margin has fallen from 8.8% in 2008, to just 2.0% during the first half of this year.

In contrast, Wolseley’s operating margin has recovered strongly since 2009, and reached an impressive 5.0% during the first half of this year. However, Wolseley’s strong share price performance has pushed the firm’s yield below the FTSE 100 average of 3.4%, making it less attractive to income buyers.

Sell or hold?

In my view, neither of these firms is a buy, but for existing holders, the decision is more difficult.

Wolseley’s business looks healthy, with attractive profit margins, strong dividend growth and low debt levels. Now might be a good time to lock in some capital gains, but for long-term investors, I think Wolseley remains a solid hold.

CRH is in the middle of a €2bn divestment programme aimed at selling non-core businesses which account for 20% of the firm’s assets, but only 10% of its earnings. This should help improve profit margins, but in my view potential gains are already reflected in the share price.

I’m concerned by CRH’s apparent failure to profit from the recovery of western construction markets: personally, I’d sell the cement giant, as I believe there are better buys elsewhere.

Where should you look?

Most property-related shares have recovered strongly over the last few years, and we’ve already seen housebuilders wobble as lending restrictions and interest rate fears bite.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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